UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2006 Commission File Number 000-22787 FOUR OAKS FINCORP, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-2028446 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524 (Address of principal executive office, including zip code) (919) 963-2177 (Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. SYES £NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer £ Accelerated filer£ Non-accelerated filer S Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): £YES SNO Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, 4,438,913 par value $1.00 per share (Number of shares outstanding (Title of Class) as of November 1, 2006) |
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FOUR OAKS FINCORP, INC.
FORM 10-Q
SEPTEMBER 30, 2006
EXPLANATORY NOTE
On August 1, 2006, after consultation with its independent registered public accounting firm, Dixon Hughes PLLC, Four Oaks Fincorp Inc. (the “Company”) and its Audit Committee determined that it was necessary to amend the accounting for certain derivative transactions relating to interest rate swap agreements on the Company’s brokered certificates of deposit under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company filed its audited restated consolidated financial statements for the fiscal year ended December 31, 2005 by amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 on September 25, 2006 and its unaudited restated interim financial statements for the period ended March 31, 2006 by amendment to the Company’s Quarterly Report on Form 10-Q for the quarterly pe riod ended March 31, 2006 on October 13, 2006. The consolidated financial statements included herein reflect the restatements of the Company’s consolidated statements of income, consolidated statements of shareholders’ equity and consolidated statements of cash flows for the periods ended September 30, 2005. The primary effects of the restatement are discussed in Item 1. Financial Statements – Notes to Consolidated Financial Statements (unaudited) – Note 2 – Restatement of Previously Issued Financial Statements.
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TABLE OF CONTENTS | Page No. |
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Part I. FINANCIAL INFORMATION |
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Item 1 - Financial Statements |
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Consolidated Balance Sheets |
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September 30, 2006 (Unaudited) and December 31, 2005 | 4 |
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Consolidated Statements of Income (Unaudited) |
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Three Months and Nine months Ended September 30, 2006 and 2005 | 5 |
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Consolidated Statements of Comprehensive Income (Unaudited) |
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Three Months and Nine months Ended September 30, 2006 and 2005 | 6 |
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Consolidated Statement of Shareholders’ Equity (Unaudited) |
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Nine months Ended September 30, 2006 | 7 |
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Consolidated Statements of Cash Flows (Unaudited) |
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Nine months Ended September 30, 2006 and 2005 | 8 |
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Notes to Consolidated Financial Statements (Unaudited) | 9 |
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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk | 19 |
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Item 4 - Controls and Procedures | 19 |
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Part II. OTHER INFORMATION |
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Item 1A - Risk Factors | 20 |
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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 20 |
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Item 6 - Exhibits | 21 |
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Part I. FINANCIAL INFORMATION
Item 1 – Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
| September 30, 2006 |
| December 31, | ||
|
|
| (Unaudited) |
| 2005* | ||
ASSETS |
| (In thousands) | |||||
Cash and due from banks | $ | 12,721 |
| $ | 13,211 | ||
Interest-earning deposits |
| 8,165 |
|
| 9,704 | ||
Investment securities available for sale |
| 106,079 |
|
| 80,209 | ||
Loans |
|
| 445,330 |
|
| 397,094 | |
Allowance for loan losses |
| (5,567) |
|
| (4,965) | ||
|
| Net loans |
| 439,763 |
|
| 392,129 |
Accrued interest receivable |
| 3,457 |
|
| 2,950 | ||
Bank premises and equipment, net |
| 11,244 |
|
| 9,683 | ||
FHLB stock |
| 3,901 |
|
| 3,655 | ||
Investment in life insurance |
| 8,390 |
|
| 7,875 | ||
Other assets |
| 4,417 |
|
| 3,456 | ||
|
| Total assets | $ | 598,137 |
| $ | 522,872 |
LIABILITIES AND SHAREHOLDERS' EQUITY |
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|
|
|
| ||
Deposits: |
|
|
|
|
|
| |
| Noninterest-bearing demand | $ | 73,556 |
| $ | 68,993 | |
| Money market and NOW accounts |
| 80,081 |
|
| 59,251 | |
| Savings |
| 34,430 |
|
| 43,900 | |
| Time deposits, $100,000 and over |
| 177,861 |
|
| 141,997 | |
| Other time deposits |
| 102,861 |
|
| 84,200 | |
|
| Total deposits |
| 468,789 |
|
| 398,341 |
Borrowings |
| 63,000 |
|
| 74,140 | ||
Subordinated debentures |
| 12,372 |
|
| - | ||
Accrued interest payable |
| 3,109 |
|
| 2,255 | ||
Other liabilities |
| 3,528 |
|
| 6,524 | ||
|
| Total liabilities |
| 550,798 |
|
| 481,260 |
Shareholders’ equity: |
|
|
|
|
| ||
| Common stock; $1.00 par value, 10,000,000 shares |
|
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|
| |
| authorized; 4,438,913 and 4,379,258 shares issued and |
|
|
|
|
| |
| outstanding at September 30, 2006 and December 31, 2005, |
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|
|
|
| |
| respectively |
| 4,439 |
|
| 4,379 | |
| Additional paid-in capital |
| 10,449 |
|
| 9,178 | |
| Retained earnings |
| 33,224 |
|
| 28,815 | |
| Accumulated other comprehensive loss |
| (773) |
|
| (760) | |
|
| Total shareholders' equity |
| 47,339 |
|
| 41,612 |
|
| Total liabilities and shareholders' equity | $ | 598,137 |
| $ | 522,872 |
* Derived from audited consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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| Three Months Ended |
| Nine months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
|
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 | ||||
|
|
|
|
|
| (As restated, see Note 2) |
|
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| (As restated, see Note 2) | ||||
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|
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| (In thousands, except per share data) | ||||||||||
Interest and dividend income: |
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| |||
| Loans, including fees | $ | 9,146 |
| $ | 7,078 |
| $ | 25,858 |
| $ | 18,991 | ||
| Investment securities: |
|
|
|
|
|
|
|
|
|
|
| ||
|
| Taxable |
| 1,261 |
|
| 578 |
|
| 3,206 |
|
| 1,623 | |
|
| Tax-exempt |
| 38 |
|
| 24 |
|
| 110 |
|
| 82 | |
| Dividends |
| 80 |
|
| 29 |
|
| 197 |
|
| 102 | ||
| Interest-earning deposits |
| 22 |
|
| 57 |
|
| 88 |
|
| 99 | ||
|
|
| Total interest and dividend income |
| 10,547 |
|
| 7,766 |
|
| 29,459 |
|
| 20,897 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
| |||
| Deposits |
| 3,709 |
|
| 2,166 |
|
| 9,879 |
|
| 5,371 | ||
| Borrowings |
| 1,053 |
|
| 558 |
|
| 2,655 |
|
| 1,475 | ||
|
|
| Total interest expense |
| 4,762 |
|
| 2,724 |
|
| 12,534 |
|
| 6,846 |
|
|
| Net interest income |
| 5,785 |
|
| 5,042 |
|
| 16,925 |
|
| 14,051 |
Provision for loan losses |
| 332 |
|
| 498 |
|
| 686 |
|
| 876 | |||
|
|
| Net interest income after |
|
|
|
|
|
|
|
|
|
|
|
|
|
| provision for loan losses |
| 5,453 |
|
| 4,544 |
|
| 16,239 |
|
| 13,175 |
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
| |||
| Service charges on deposit accounts |
| 539 |
|
| 488 |
|
| 1,541 |
|
| 1,392 | ||
| Other service charges, commissions and fees |
| 486 |
|
| 385 |
|
| 1,276 |
|
| 935 | ||
| Loss on sale of investment securities |
| (17) |
|
| (66) |
|
| (103) |
|
| (179) | ||
| Gain on sale of loans |
| - |
|
| 3 |
|
| 71 |
|
| 53 | ||
| Gain (loss) on hedges |
| 146 |
|
| (379) |
|
| (162) |
|
| (235) | ||
| Merchant fees |
| 171 |
|
| 130 |
|
| 304 |
|
| 299 | ||
| Income from investment in bank-owned life insurance |
| 332 |
|
| 170 |
|
| 515 |
|
| 254 | ||
|
|
| Total non-interest income |
| 1,657 |
|
| 731 |
|
| 3,442 |
|
| 2,519 |
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
| |||
| Salaries |
| 1,793 |
|
| 1,560 |
|
| 5,159 |
|
| 4,491 | ||
| Employee benefits |
| 345 |
|
| 355 |
|
| 1,007 |
|
| 978 | ||
| Occupancy expense of premises, net |
| 188 |
|
| 134 |
|
| 490 |
|
| 407 | ||
| Equipment expense |
| 369 |
|
| 328 |
|
| 1,098 |
|
| 991 | ||
| Professional and consulting fees |
| 240 |
|
| 230 |
|
| 836 |
|
| 757 | ||
| Other taxes and licenses |
| 71 |
|
| 63 |
|
| 215 |
|
| 197 | ||
| Merchant processing expense |
| 182 |
|
| 99 |
|
| 266 |
|
| 260 | ||
| Other operating expense |
| 702 |
|
| 589 |
|
| 2,114 |
|
| 1,880 | ||
|
|
| Total non-interest expense |
| 3,890 |
|
| 3,358 |
|
| 11,185 |
|
| 9,961 |
|
|
| Income before income taxes |
| 3,220 |
|
| 1,917 |
|
| 8,496 |
|
| 5,733 |
Provision for income taxes |
| 1,074 |
|
| 700 |
|
| 2,974 |
|
| 2,035 | |||
|
|
| Net income | $ | 2,146 |
| $ | 1,217 |
| $ | 5,522 |
| $ | 3,698 |
Basic net income per common share | $ | 0.39 |
| $ | 0.22 |
| $ | 1.00 |
| $ | 0.68 | |||
Diluted net income per common share | $ | 0.38 |
| $ | 0.21 |
| $ | 0.99 |
| $ | 0.68 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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|
|
| Three Months Ended |
| Nine months Ended | ||||||||
|
|
|
| September 30, |
| September 30, | ||||||||
|
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 | ||||
|
|
|
|
|
| (As restated, see Note 2) |
|
|
| (As restated, see Note 2) | ||||
|
|
|
| (In thousands, except per share data) | ||||||||||
Net income | $ | 2,146 |
| $ | 1,217 |
| $ | 5,522 |
| $ | 3,698 | |||
Other comprehensive income (loss): |
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|
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|
|
|
|
|
|
| |||
| Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
| ||
|
| Unrealized holding gains (losses) on |
|
|
|
|
|
|
|
|
|
|
| |
|
| available for sale securities |
| 727 |
|
| (184) |
|
| (323) |
|
| (574) | |
|
|
| Tax effect |
| (187) |
|
| 73 |
|
| 130 |
|
| 230 |
|
| Reclassification of losses recognized |
|
|
|
|
|
|
|
|
|
|
| |
|
| in net income |
| 17 |
|
| 66 |
|
| 103 |
|
| 179 | |
|
|
| Tax effect |
| (7) |
|
| (26) |
|
| (41) |
|
| (72) |
|
| Net of tax amount |
| 550 |
|
| (71) |
|
| (131) |
|
| (237) | |
| Cash flow hedging activities: |
|
|
|
|
|
|
|
|
|
|
| ||
|
| Unrealized holding gains (losses) on cash flow |
|
|
|
|
|
|
|
|
|
|
| |
|
| hedging activities |
| 232 |
|
| (185) |
|
| 198 |
|
| (300) | |
|
|
| Tax effect |
| (93) |
|
| 74 |
|
| (80) |
|
| 121 |
|
| Net of tax amount |
| 139 |
|
| (111) |
|
| 118 |
|
| (179) | |
|
|
| Total other comprehensive income (loss) |
| 689 |
|
| (182) |
|
| (13) |
|
| (416) |
Comprehensive income | $ | 2,835 |
| $ | 1,035 |
| $ | 5,509 |
| $ | 3,282 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
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| Accumulated |
|
|
| |
|
|
|
|
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| Additional |
|
|
|
| other |
| Total | |||
| Common Stock |
| paid-in |
| Retained |
| comprehensive |
| shareholders' | |||||||
| Shares |
| Amount |
| capital |
| earnings |
| loss |
| equity | |||||
| (Amounts in thousands, except share and per share data) | |||||||||||||||
Balance, December 31, 2005 | 4,379,258 |
| $ | 4,379 |
| $ | 9,178 |
| $ | 28,815 |
| $ | (760) |
| $ | 41,612 |
Net income | - |
|
| - |
|
| - |
|
| 5,522 |
|
| - |
|
| 5,522 |
Other comprehensive loss | - |
|
| - |
|
| - |
|
| - |
|
| (13) |
|
| (13) |
Issuance of common stock | 62,155 |
|
| 62 |
|
| 1,043 |
|
| - |
|
| - |
|
| 1,105 |
Current income tax benefit | - |
|
| - |
|
| 124 |
|
| - |
|
| - |
|
| 124 |
Stock-based compensation | - |
|
| - |
|
| 104 |
|
| - |
|
| - |
|
| 104 |
Purchases and retirement of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock | (2,500) |
|
| (2) |
|
| - |
|
| (53) |
|
| - |
|
| (55) |
Cash dividends of $.19 per share | - |
|
| - |
|
| - |
|
| (1,060) |
|
| - |
|
| (1,060) |
Balance, September 30, 2006 | 4,438,913 |
| $ | 4,439 |
| $ | 10,449 |
| $ | 33,224 |
| $ | (773) |
| $ | 47,339 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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|
|
| Nine months Ended | ||||
|
|
|
| September 30, | ||||
|
|
|
| 2006 |
| 2005 | ||
|
|
|
|
|
|
| (As restated, see Note 2) | |
|
|
|
| (In thousands) | ||||
Cash flows from operating activities: |
|
|
|
|
| |||
Net income |
| $ | 5,522 |
| $ | 3,698 | ||
Adjustments to reconcile net income to net cash |
|
|
|
|
| |||
provided by operating activities: |
|
|
|
|
| |||
| Provision for loan losses |
| 686 |
|
| 876 | ||
| Provision for depreciation and amortization |
| 776 |
|
| 780 | ||
| Net amortization (accretion) of bond premiums and discounts |
| (24) |
|
| 18 | ||
| Stock-based compensation |
| 104 |
|
| - | ||
| Loss on sale of securities |
| 103 |
|
| 179 | ||
| Gain on sale of loans |
| (71) |
|
| (53) | ||
| Loss on disposition of premises and equipment |
| 1 |
|
| - | ||
| Gain on sale of foreclosed assets |
| (14) |
|
| - | ||
| Increase in cash surrender value of life insurance |
| 515 |
|
| (254) | ||
| Net change in hedging activity |
| (162) |
|
| (235) | ||
| Changes in assets and liabilities: |
|
|
|
|
| ||
|
| Increase in other assets |
| (2,049) |
|
| (863) | |
|
| Decrease in interest receivable |
| (507) |
|
| (273) | |
|
| (Decrease) increase in other liabilities |
| (2,636) |
|
| 1,622 | |
|
| Increase in interest payable |
| 854 |
|
| 864 | |
|
|
| Net cash provided by operating activities |
| 3,098 |
|
| 6,359 |
Cash flows from investing activities: |
|
|
|
|
| |||
| Proceeds from sales and calls of securities available for sale |
| 13,064 |
|
| 28,153 | ||
| Purchase of securities available for sale |
| (39,233) |
|
| (40,567) | ||
| Purchase of FHLB stock |
| (1,285) |
|
| (563) | ||
| Redemption of FHLB stock |
| 1,039 |
|
| - | ||
| Net increase in loans |
| (48,294) |
|
| (65,921) | ||
| Additions to premises and equipment |
| (2,331) |
|
| (494) | ||
| Proceeds from sale of foreclosed assets |
| 124 |
|
| 528 | ||
| Expenditures on foreclosed assets |
| (5) |
|
| - | ||
| Purchases of bank-owned life insurance |
| - |
|
| (1,520) | ||
|
|
| Net cash used in investment activities |
| (76,921) |
|
| (80,384) |
Cash flows from financing activities: |
|
|
|
|
| |||
| Net proceeds from borrowings |
| (11,140) |
|
| 12,005 | ||
| Net increase in deposit accounts |
| 70,448 |
|
| 60,390 | ||
| Proceeds from subordinated debentures |
| 12,372 |
|
| - | ||
| Proceeds from issuance of common stock |
| 1,105 |
|
| 943 | ||
| Excess tax benefits from stock options |
| 124 |
|
| - | ||
| Purchase and retirement of common stock |
| (55) |
|
| - | ||
| Cash dividends paid |
| (1,060) |
|
| (931) | ||
|
|
| Net cash provided by financing activities |
| 71,794 |
|
| 72,407 |
|
|
| Net decrease in cash and cash equivalents |
| (2,029) |
|
| (1,618) |
Cash and cash equivalents at beginning of period |
| 22,915 |
|
| 14,249 | |||
|
|
| Cash and cash equivalents at end of period | $ | 20,886 |
| $ | 12,631 |
- 8 -
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
In management’s opinion, the financial information contained in the accompanying unaudited consolidated financial statements reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and nine month periods ended September 30, 2006 and 2005, respectively, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Four Oaks Fincorp, Inc. (the "Company") and its wholly-owned subsidiaries, Four Oaks Bank & Trust Company (the “Bank”) and Four Oaks Mortgage Services, LLC, a mortgage origination subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. In March 2006, the Company formed Four Oaks Statutory Trust I, a wholly owned Del aware statutory business trust (the “Trust”), for the sole purpose of issuing Trust Preferred Securities (as defined in Note 6 below). The Trust is not included in the consolidated financial statements of the Company, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of ARB No. 51” (“FIN 46R”). Operating results for the three and nine month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.
The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as amended. This Quarterly Report should be read in conjunction with such Annual Report.
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company filed its audited restated consolidated financial statements for the fiscal year ended December 31, 2005 by amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 on September 25, 2006 and its unaudited restated interim financial statements for the period ended March 31, 2006 by amendment to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 on October 13, 2006. These amendments were done to amend the accounting for certain derivative transactions relating to interest rate swap agreements on the Company’s brokered certificates of deposit under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).
Since late in 2003, the Company has entered into interest rate swap agreements to hedge the interest rate risk inherent in certain of its brokered certificates of deposit. From inception, the Company has applied a method of fair value hedge accounting under SFAS No. 133 (the "short-cut” method) that is appropriate if the hedging transactions are perfectly effective. However, after further examination in light of recent developments and discussions with its independent registered public accounting firm, Dixon Hughes PLLC, the Company and its Audit Committee concluded that the swap transactions did not qualify for the “short-cut” method and documentation regarding these transactions did not meet the technical requirements of SFAS No. 133. Therefore, any fluctuations in the market value of these interest rate risk management derivatives should have been r ecorded through the income statement. There is no effect on cash flows from these revisions. Although these swaps have performed as expected, by providing an economic hedge against interest rate risk, the Company determined that it did not have adequate documentation at the inception of the interest rate swap agreements to qualify for hedge accounting treatment under SFAS No. 133. The Company plans to redesignate the interest swap agreements as hedges under the “long-haul” accounting method.
- 9 -
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)
The primary effect of this change in accounting treatment is the inclusion in net income of any increases or decreases in the fair value of interest rate swap agreements previously designated as hedges under SFAS No. 133. This is because fair value hedge accounting under SFAS No. 133 allows a company to record the change in fair value of the hedged item (in this case, brokered certificates of deposit) as an adjustment to income as an offset to the fair value adjustment on the related interest rate swap. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the brokered certificates of deposit. Additionally, the net cash settlement payments received during each of the above periods for these interest rate swaps were reclassified from interest expense on brokered certificates of deposit to non-interest income. The broker fee has been recognized as a deferred financing cost and is amortized to interest expense over the life of the related certificates of deposit.
Below are the Company’s consolidated statements of income, consolidated statements of shareholders' equity and consolidated statements of cash flows stating both previously reported and restated amounts for the periods ended September 30, 2005:
Consolidated Statements of Income (Unaudited):
| Three Months Ended |
| Nine months Ended | ||||||||||||||
| September 30, 2005 |
| September 30, 2005 | ||||||||||||||
| As Previously Reported |
| Adjustment |
| As restated |
| As Previously Reported |
| Adjustment |
| As restated | ||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||
Interest expense on Deposits | $ | 2,138 |
| $ | 28 |
| $ | 2,166 |
| $ | 5,179 |
| $ | 192 |
| $ | 5,371 |
Total interest expense |
| 2,696 |
|
| 28 |
|
| 2,724 |
|
| 6,654 |
|
| 192 |
|
| 6,846 |
Net interest income |
| 5,070 |
|
| (28) |
|
| 5,042 |
|
| 14,243 |
|
| (192) |
|
| 14,051 |
Net interest income after provision for loan losses |
| 4,572 |
|
| (28) |
|
| 4,544 |
|
| 13,367 |
|
| (192) |
|
| 13,175 |
Loss on hedges, net |
| - |
|
| (379) |
|
| (379) |
|
| - |
|
| (235) |
|
| (235) |
Total non-interest income |
| 1,110 |
|
| (379) |
|
| 731 |
|
| 2,754 |
|
| (235) |
|
| 2,519 |
Income (Loss) before income taxes |
| 2,324 |
|
| (407) |
|
| 1,917 |
|
| 6,160 |
|
| (427) |
|
| 5,733 |
Provision for income taxes |
| 857 |
|
| (157) |
|
| 700 |
|
| 2,200 |
|
| (165) |
|
| 2,035 |
Net income (Loss) |
| 1,467 |
|
| (250) |
|
| 1,217 |
|
| 3,960 |
|
| (262) |
|
| 3,698 |
Basic net income (loss) per common share | $ | 0.27 |
| $ | (0.05) |
| $ | 0.22 |
| $ | 0.73 |
| $ | (0.05) |
| $ | 0.68 |
Diluted net income (loss) per common share | $ | 0.26 |
| $ | (0.05) |
| $ | 0.21 |
| $ | 0.73 |
| $ | (0.05) |
| $ | 0.68 |
- 10 -
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)
| Nine months Ended | |||||||
| September 30, 2005 | |||||||
Consolidated Statements of Shareholders' | As Previously Reported |
| Adjustment |
| As restated | |||
Equity (Unaudited): | (Amounts in thousands) | |||||||
Total shareholders' equity, January 1, 2005 | $ | 37,295 |
| $ | - |
| $ | 37,295 |
Net income (loss) |
| 3,960 |
|
| (262) |
|
| 3,698 |
Total shareholders' equity, September 30, 2005 |
| 40,910 |
|
| (262) |
|
| 40,648 |
|
|
|
|
|
|
|
|
|
| Nine months Ended | |||||||
| September 30, 2005 | |||||||
Consolidated Statements of Cash Flows | As Previously Reported |
| Adjustment |
| As restated | |||
(Unaudited) | (Amounts in thousands) | |||||||
Cash Flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) | $ | 3,960 |
| $ | (262) |
| $ | 3,698 |
Loss on hedges |
| - |
|
| (235) |
|
| (235) |
Increase in other assets |
| (436) |
|
| (427) |
|
| (863) |
Increase in other liabilities |
| (339) |
|
| 1,961 |
|
| 1,622 |
Net cash provided by operating activities |
| 5,322 |
|
| 1,037 |
|
| 6,359 |
Cash Flows from financing activities |
|
|
|
|
|
|
|
|
Net increase (decease) in deposit accounts |
| 61,427 |
|
| (1,037) |
|
| 60,390 |
Net cash provided by financing activities |
| 73,444 |
|
| (1,037) |
|
| 72,407 |
NOTE 3 - NET INCOME PER SHARE
Basic and diluted net income per common share are computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for 5-for-4 stock split paid on November 10, 2006. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the net income of the Company.
Basic and diluted net income per common share have been computed based upon net income as presented in the accompanying consolidated statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
|
| Three Months Ended |
| Nine months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
Weighted average number of |
|
|
|
|
|
|
| |
| common shares used in computing |
|
|
|
|
|
|
|
| basic net income per share | 5,537,493 |
| 5,441,993 |
| 5,518,490 |
| 5,420,333 |
Effect of dilutive stock options | 49,121 |
| 40,985 |
| 43,245 |
| 38,195 | |
Weighted average number of |
|
|
|
|
|
|
| |
| common shares and dilutive potential common shares used in computing diluted net income per share | 5,586,614 |
| 5,482,978 |
| 5,561,735 |
| 5,458,528 |
- 11 -
NOTE 3 - NET INCOME PER SHARE (Continued)
As of September 30, 2006 and 2005, there were no antidilutive shares outstanding for either the three or nine month period.
NOTE 4 - STOCK COMPENSATION PLANS
Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment," ("SFAS No. 123R") which was issued by FASB in December 2004. SFAS No. 123R revises Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (“APB No. 25”) and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.
The Company adopted SFAS No. 123R using the modified-prospective-transition method application as permitted under SFAS No. 123R. As permitted by SFAS No. 123R when using this method, prior period amounts have not been restated. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company's common stock on the date of grant.
As of September 30, 2006, the Company maintains a Nonqualified Stock Option Plan (the “Plan”), which provides for grants of nonqualified stock options to officers and directors of the Company and its subsidiaries and has not been approved by shareholders. The Plan is administered by the Compensation Committee of the Company’s board of directors, which has broad discretionary authority to administer the Plan, and issues options at a price approximating market as determined by the committee. As of September 30, 2006, 1,220,703 shares had been reserved for issuance under the Plan. All options granted subsequent to a 1997 amendment will be 100% vested one year from the grant date and will expire after such period as is determined by the board of directors at the time of grant. Options granted prior to the amendment have ten year lives and a five year level vesting provision.
The Company granted 41,750 and 48,594 nonqualified stock options for the nine month period ended September 30, 2006 and September 30, 2005, respectively, with a weighted-average fair value of $4.80 and $3.79 per option, respectively.
The compensation cost that has been charged against income for the Plan was approximately $40,000 and $104,000 for the three month period and nine month period ended September 30, 2006, respectively. The Company recorded a deferred tax benefit in the amount of $15,000 and $46,000 related to share-based compensation during the three month period and nine month periods ended September 30, 2006, respectively.
- 12 -
NOTE 4 - STOCK COMPENSATION PLANS (Continued)
The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the table below. The risk-free interest rate is based on a U.S. Treasury instrument with a life that is similar to the expected life of the option grant. Expected volatility is based on the historical volatility of shares of the Company’s common stock based on the prior three years trading history. The expected term of the options is based on the average life of previously issued stock options. The expected dividend yield is based on current yield on date of grant. The options are not subject to any post-vesting restrictions.
The followingtable illustrates the assumptions that the Company used in the Black-Scholes option pricing model for determining the fair value of options granted to employees in the nine month periods ended September 30, 2006 and 2005 under the Plan.
| Nine months Ended | ||
| September 30, | ||
| 2006 |
| 2005 |
Dividend yield | 1.53% |
| 1.84% |
Expected volatility | 20.72% |
| 24.31% |
Risk free interest rate | 4.73% |
| 3.75% |
Expected life | 4 years |
| 4 years |
The following is a summary of the status of the Company’s outstanding stock options under the Plan for the nine months ended September 30, 2006:
Options |
| Weighted average Option Price | |
| Outstanding |
| Per Share |
Balance December 31, 2005 | 188,740 |
| $10.76 |
Granted | 41,750 |
| $18.40 |
Exercised | (40,025) |
| $9.15 |
Forfeited | - |
| - |
Expired | (750) |
| $8.19 |
Balance September 30, 2006 | 189,715 |
| $12.79 |
|
|
|
|
Additional information concerning the Company’s outstanding stock options under the Plan as of September 30, 2006 is as follows:
| Exercise Price | Number Outstanding |
| Remaining Contractual Life |
| Number Exercisable |
$ | 4.74 | 8,240 |
| .44 years |
| 8,240 |
$ | 9.22 | 50,602 |
| .41 years |
| 50,602 |
$ | 11.26 | 43,654 |
| 1.40 years |
| 43,654 |
$ | 14.56 | 45,469 |
| 2.40 years |
| 45,469 |
$ | 18.40 | 41,750 |
| 3.40 years |
| - |
|
| 189,715 |
|
|
| 147,965 |
- 13 -
NOTE 4 - STOCK COMPENSATION PLANS (Continued)
As of September 30, 2006, the aggregate intrinsic value of outstanding and exercisable options amounted to $2.05 million and $1.83 million, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $340,000. The fair value of the options vested during this nine month period was $119,000.
As of September 30, 2006, there was $40,000 of unrecognized cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 4.5 months.
Cash received from option exercises under all share-based payment arrangements for the nine months ended September 30, 2006 was $366,000. The tax benefit realized for tax deductions from option exercise of the share-based payment arrangements during the nine months ended September 30, 2006 was $124,000.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123R to options granted under the Company’s stock option plans for the nine months ended September 30, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized to expense over the options’ vesting periods.
|
|
|
| Three Months Ended |
| Nine months Ended | ||
|
|
|
| September 30, |
| September 30, | ||
|
|
|
| 2005 |
| 2005 | ||
|
|
|
| (Amounts in thousands, except per share data, as restated) | ||||
Net income: |
|
|
|
|
| |||
| As reported | $ | 1,217 |
| $ | 3,698 | ||
|
| Deduct: Total stock-based employee |
|
|
|
|
| |
|
|
| compensation expense determined |
|
|
|
|
|
|
|
| under fair value method for all |
|
|
|
|
|
|
|
| awards, net of related tax effects |
| (23) |
|
| (66) |
| Pro forma | $ | 1,194 |
| $ | 3,632 | ||
Basic earnings per share: |
|
|
|
|
| |||
| As reported | $ | 0.22 |
| $ | 0.68 | ||
| Pro forma |
| 0.22 |
|
| 0.67 | ||
Diluted earnings per share: |
|
|
|
|
| |||
| As reported | $ | 0.21 |
| $ | 0.68 | ||
| Pro forma |
| 0.22 |
|
| 0.66 |
NOTE 5 - COMMITMENTS
As of September 30, 2006, loan commitments were as follows (in thousands):
Commitments to extend credit $ 114,787 Undisbursed lines of credit 27,122 Letters of credit 5,645 |
- 14 -
NOTE 6 - TRUST PREFERRED SECURITIES
On March 30, 2006, $12.0 million of trust preferred securities (“Trust Preferred Securities”) were placed through the Trust. The Trust has invested the net proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the “Debentures”) issued by the Company and recorded in borrowings on the accompanying consolidated balance sheet. The Trust Preferred Securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to three month LIBOR plus 1.35%. The dividends paid to holders of the Trust Preferred Securities, which will be recorded as interest expense, are deductible for income tax purposes. The Trust Preferred Securities are redeemable on June 15, 2011 or afterwards in whole or in part, on any June 15, September 15, December 15 or March 15. Redemption is man datory at June 15, 2036. The Company has fully and unconditionally guaranteed the Trust Preferred Securities through the combined operation of the Debentures and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The Trust Preferred Securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of the financial condition and results of operations of the Company and its subsidiaries and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report.
The Company filed its audited restated consolidated financial statements for the fiscal year ended December 31, 2005 by amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 on September 25, 2006 and its unaudited restated interim financial statements for the period ended March 31, 2006 by amendment to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 on October 13, 2006. These amendments were done to amend the accounting for certain derivative transactions relating to interest rate swap agreements on the Company’s brokered certificates of deposit under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). The primary effects of the restatement are discussed in Item 1. Financial Statements 0; Notes to Consolidated Financial Statements (unaudited) – Note 2 – Restatement of Previously Issued Financial Statements.
Comparison of Financial Condition at
September 30, 2006 and December 31, 2005
During the nine months ended September 30, 2006, the Company’s total assets grew from $522.9 million at December 31, 2005 to $598.1 million, an increase of $75.2 million or 14%. The Company’s liquid assets, consisting of cash and cash equivalents and investment securities available for sale, experienced a net increase of $23.8 million, primarily from a $25.9 million increase in investment securities partially offset by a decrease of $1.5 million in interest-earning deposits. Additional funds available from deposit growth provided an opportunity to increase investments as yields improved during the nine months ended September 30, 2006. Net loans grew from $392.1 million at December 31, 2005 to $439.8 million at September 30, 2006. The Company’s loan portfolio continues to reflect a trend towards growth in commercial real estate lending and construction loans. Deposits from the Company’s local market continued to be its primary funding source, increasing by $48.4 million, while wholesale deposits increased $22.0 million. Total deposits grew from $398.3 million at December 31, 2005 to $468.8 million at September 30, 2006. This increase was primarily a result of an $54.5 million increase in the Company’s time deposit accounts, a $4.6 million increase in its non-interest bearing deposits and a $20.8 million increase in its interest checking deposits, offset by a decrease of $9.5
- 15 -
million in savings deposits. Deposit growth continued to increase although the national prime rate has remained at 8.25% since June 29, 2006.
During March 2006, the Company formed Four Oaks Statutory Trust I, a Delaware trust for the sole purpose of issuing $12.0 million in Trust Preferred Securities, with a liquidation amount of $1,000 per capital security, in pooled offerings of Trust Preferred Securities. The Trust sold its common securities to the Company for an aggregate principal amount of $372,000, resulting in total proceeds from the offering of approximately $12.4 million. The Trust used the proceeds to purchase $12.4 million in principal amount of the Debentures. The Debentures have a 30-year maturity and are redeemable after five years by the Company with certain exceptions. The Debentures will require quarterly interest payments (subject to certain deferment options) and bear interest at a variable rate equal to the three month LIBOR plus 1.35%, with LIBOR adjusted quarterly. The net proceeds increased the regulatory cap ital of the Bank and are being used to provide funding for continued growth of the Bank and are included in borrowings on the consolidated balance sheet.
Total shareholders’ equity increased approximately $5.7 million from $41.6 million at December 31, 2005 to $47.3 million at September 30, 2006. This increase in shareholders’ equity resulted principally from income from operations during the period of $5.5 million, net proceeds from the issuance of common stock from stock option exercises of $490,000, income from employee stock purchases of $143,000, dividend reinvestment in the amount of $596,000,and stock compensation expense of $104,000 resulting from the Company’s adoption of SFAS No. 123(R) at the beginning of 2006. Offsetting these increases were other comprehensive losses of $13,000, dividends paid to its shareholders of $1,060,000 and the cash outlays for repurchases of the Company’s common stock of $55,000. As of September 30, 2006, both the Company and the Bank were considered to be well capi talized as such term is defined in applicable federal regulations.
Results of Operations for the Three Months Ended
September 30, 2006 and 2005
Net Income. Net income for the three months ended September 30, 2006 was $2.1 million, or $.39 basic net income per share, as compared with net income of $1.2 million, or $.22 basic net income per share for the three months ended September 30, 2005, an increase of $929,000, or $.17 per share. This increase resulted primarily from a $743,000 increase in the Company’s net interest income which included a $927,000 increase in non-interest income, a $532,000 increase in non interest expense and a $374,000 increase in the tax provision.
Net Interest Income. Like most financial institutions, the primary component of earnings for the Bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-i nterest-bearing liabilities and capital. The Debentures issued in connection with the offering of Trust Preferred Securities will bear interest based on the three month LIBOR plus 1.35%, with LIBOR adjusted quarterly, and, accordingly, the Company expects interest expense will increase in 2006 as a result of the interest payments on the Debentures. In September 2006, there was an interest payment of $211,000 on the Debentures.
Net interest income for the three months ended September 30, 2006 was $5.8 million, an increase of $743,000 compared to the three months ended September 30, 2005, which resulted primarily from the increase in the level of the Company’s average interest-earning assets of $120.4 million relative to the
- 16 -
increase in the level of its average interest-bearing liabilities of $97.0 million during the quarter. The accelerated repricing rate on deposits resulted in a decrease in the Company’s net interest margin by 48 basis points from 4.65% during the three months ended September 30, 2005 to 4.17% during the three months ended September 30, 2006.
Provision for Loan Losses. The provision for loan losses was $332,000 and $498,000 for the three months ended September 30, 2006 and 2005, respectively, a decrease of $166,000. Net charge-offs of $75,000 were recorded during the three months ended September 30, 2006, compared to net charge-offs of $132,000 for the three months ended September 30, 2005. Non-performing loans aggregated $1.9 million at September 30, 2006, an increase of $534,000 from the $1.3 million at December 31, 2005, while the allowance for loan losses, expressed as a percentage of gross loans, was 1.25% at September 30, 2006 and December 31, 2005, respectively. Management believes that the allowance is adequate to absorb probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income increased $927,000 for the three months ended September 30, 2006 to $1.7 million as compared to $731,000 million for the same period in 2005. The increase is primarily a result of the market interest rate changes affecting the Company’s hedging activities of $525,000, increases in service charges on deposits of $51,000, bank-owned life insurance income of $162,000, a $101,000 increase in agent commissions from the financial services division, a $41,000 increase in merchant fees and a decrease in the loss on the sale of investments of $49,000 from the same quarter in 2005.
Non-Interest Expense. Non-interest expense increased $532,000 to $3.9 million for the three months ended September 30, 2006 compared to $3.4 million for the three months ended September 30, 2005. This increase was due in part to increases in salaries and employee benefits of $223,000, which resulted from normal salary adjustments and additional staffing for new offices. Other significant increases resulted from occupancy expenses of $54,000, equipment expenses of $41,000, merchant processing expenses of $83,000 and other operating expenses of $113,000. The primary increases in other operating expenses included increases in advertising cost of $25,000, travel and entertainment and auto expense of approximately $12,000, printing and office supply expenses of $26,000 and ATM operating expenses of $23,000. There were no other significant increases in any of the remaining non-interest expenses.
Provision for Income Taxes. The Company’s provision for income taxes, as a percentage of income before income taxes, was 33.3% and 36.5% for the three months ended September 30, 2006 and 2005, respectively.
Results of Operations for the Nine months Ended
September 30, 2006 and 2005
Net Income. Net income for the nine months ended September 30, 2006 was $5.5 million, or $1.00 per basic share, as compared with net income of $3.7 million, or $.68 per basic share for the nine months ended September 30, 2005, an increase of $1.8 million, or $.32 per basic share. This increase resulted primarily from an increase in the Company’s net interest income of $2.9 million and a $922,000 increase in non-interest income, which was offset by increases of $1.2 million in other non-interest expense and $939,000 in provision for income taxes.
Net Interest Income. Net interest income for the nine months ended September 30, 2006 was $16.9 million, as compared with $14.0 million during the nine months ended September 30, 2005, an increase of $2.9 million, which resulted primarily from the increase in the level of the Company’s average interest-earning assets relative to the increase in the level of its average interest-bearing liabilities during the period. The Company’s average interest-earning assets increased $109.9 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, while during the same period, its average interest-bearing liabilities increased $93.4 million, thereby resulting in an increase in the level of its net interest-earning assets during the current year
- 17 -
period of $16.5 million. Additionally, the Company’s average non-interest-bearing deposits increased $9.7 million for the nine months ended September 30, 2006 compared to the corresponding period in 2005. Strong loan demand and continued normal growth in deposits were the contributing factors for the increased level of interest-earning assets and interest-bearing liabilities. The Company’s net interest margin decreased 34 basis points from 4.71% for the nine months ended September 30, 2005 to 4.37% for the nine months ended September 30, 2006. This decrease was primarily due to an 85 basis point increase in the interest rates on borrowings from 4.16% in 2005 to 5.01% in the nine months ended September 30, 2006, and a 135 basis point increase in interest rates on other deposit accounts from 2.47% to 3.82% for the same time period, which occurred even though the Company repriced its loans re lative to prime during the nine months ended September 30, 2006.
Provision for Loan Losses. The provision for loan losses was $686,000 and $876,000 for the nine months ended September 30, 2006 and 2005, respectively, a decrease of $190,000. Net charge-offs of $84,000 were recorded during the nine months ended September 30, 2006, compared to $231,000 for the nine months ended September 30, 2005. Non-performing loans aggregated $1.9 million at September 30, 2006, increasing $534,000 from the $1.3 million at December 31, 2005, while the allowance for loan losses, expressed as a percentage of gross loans, was 1.25% at September 30, 2006 and December 31, 2005, respectively. Management believes that the allowance is adequate to absorb probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income increased $923,000 for the nine month period ended September 30, 2006 as compared to September 30, 2005. The increase was primarily a result of increases in insufficient fee income and other service charges on deposit accounts of $149,000 and other non-interest income of $773,000. The other non-interest income increase resulted primarily from an increase in income generated from bank-owned life insurance of $261,000, commissions generated by the Company’s financial services division of $71,000, check card and other credit card fee income of $73,000, a $13,000 increase in loan fees received from the Company’s partnership with Four Oaks Mortgage Services, LLC, a $12,000 increase due to equity earnings in the Statutory Trust Co, an increase in other income on loans of $18,000 and an income distribution of $235,000 from the Company’s investment in an investment fund and a decrease in the loss on the hedging activity of $73,000.
Non-Interest Expense. Non-interest expense increased $1.2 million to $11.2 million for the nine months ended September 30, 2006 compared to $10.0 million for the nine months ended September 30, 2005. This increase was primarily due to an increase in salaries and employee benefits of $697,000, which resulted from normal salary adjustments, the addition of new personnel, and rising insurance costs. The remaining increase in non-interest expense included increases in additional facilities and equipment cost of $190,000, advertising expense of approximately $83,000, travel and entertainment and auto expense of $27,000, cardholder and merchant expenses of $27,000, printing and office supplies and postage of $40,000, other taxes and licenses of $18,000, donations and contributions $12,000, ATM operations fees of $28,000 and professional and legal fees of $79,000, primarily related to e xpenses for compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Provision for Income Taxes. The Company’s provision for income taxes, as a percentage of income before income taxes, was 35.0% and 35.5% for the nine months ended September 30, 2006 and 2005, respectively.
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Liquidity and Capital Resources
The Company’s liquidity position is primarily dependent upon the Bank’s need to respond to loan demand, the short-term demand for funds caused by withdrawals from deposit accounts (other than time deposits) and the liquidity of its assets. The Bank’s primary liquidity sources include cash and amounts due from other banks, federal funds sold, and U.S. Government Agency and other short-term investment securities. In addition, during March 2006, the net proceeds from the offering of the Trust Preferred Securities increased the regulatory capital of the Bank and are being used to provide funding for continued growth of the Bank. The Bank also has the ability to borrow funds from the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta and to purchase federal funds from other financial institutions. Management believes that the Company’s liquidity sources are adequate to meet its operating needs and the operating needs of the Bank for the next eighteen months. Total shareholders’ equity was $47.3 million, or 7.9%, of total assets at September 30, 2006 and $41.6 million, or 8.0%, of total assets at December 31, 2005.
Forward-Looking Information
Information set forth in this Quarterly Report on Form 10-Q, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements represent the Company’s judgment concerning the future and are subject to risks and uncertainties that could cause its actual operating results and financial position to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof, or other variations thereof, or comparable termi nology.
The Company cautions that any such forward-looking statements are further qualified by important factors that could cause its actual operating results to differ materially from those anticipated in the forward-looking statements, including, without limitation, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates on the level and composition of deposits, the effects of competition from other financial institutions, the failure of assumptions underlying the establishment of the allowance for loan losses, the low trading volume of the Company’s common stock, other considerations described in connection with specific forward-looking statements and other cautionary elements specified in Part II, Item 1A of this Quarterly Report and the Company’s periodic filings with the Securities and Exchange Commission (the “Commission”), including without limitation, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes there has not been any material change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and the difference between estimated fair values and book values, since the analysis prepared and presented in conjunction with its Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as amended.
ITEM 4 – CONTROLS AND PROCEDURES
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. As defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, the term disclosure controls and procedures means controls and other
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procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (the “SEC’s”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures are effective, in that they provide reasonable assurances that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the SEC’s rules and forms.
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report that the Company believes have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Part II.
OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes in the Company’s risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2005, as amended.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of the Company’s common stock during the three months ended September 30, 2006:
Period | Total Number of Shares Purchased (1) |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Program (2) |
| Maximum Number of Shares That May Yet Be Purchased Under the Program (2) | |
July 1, 2006 to July 31, 2006 | 1,885 |
| $ | 27.16 |
| - |
| - |
August 1, 2006 to August 31, 2006 | - |
| $ | - |
| - |
| - |
September 1, 2006 to September 30, 2006 | - |
| $ | - |
| - |
| - |
Total | 1,885 |
| $ | 27.16 |
| - |
| - |
(1)
Represents purchase of stock on the open market by the Company on behalf of the Employee Stock Ownership Plan, which was adopted by the Company in January 2001.
(2)
On December 10, 2001, the Company announced the authorization by its Board of Directors of a program to repurchase up to 100,000 shares of the Company’s outstanding common stock, which expires on December 31, 2006. The Company did not repurchase any stock under the program during the three months ended September 30, 2006. As of September 30, 2006, there were an aggregate of 100,000 shares of the Company’s common stock that have been approved for repurchase under the program, of which an aggregate of 65,889 shares have already been repurchased and 34,111 shares remained authorized for repurchase under the program.
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ITEM 6 -
EXHIBITS
Exhibit | Description |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-4(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FOUR OAKS FINCORP, INC. | |
Date: November 14, 2006 | By: | /s/ Ayden R. Lee, Jr. |
|
| Ayden R. Lee, Jr. |
|
| President and Chief Executive Officer |
Date: November 14, 2006 | By: | /s/ Nancy S. Wise |
|
| Nancy S. Wise |
|
| Executive Vice President and Chief Financial Officer |
|
|
|
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Exhibit Index
Exhibit | Description |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-4(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |